APPENDIX A CITY OF LOS ANGELES INFORMATION STATEMENT As of January 18, 2018 Certain statements included or incorporated by reference in this Appendix A constitute forward-looking statements. Such forward-looking statements are generally identifiable by the terminology used such as plan, expect, estimate, project, budget or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements. No assurance is given that actual results will meet City forecasts in any way, regardless of the level of optimism communicated in the information. The City has no plans to issue any updates or revisions to those forward-looking statements if or when its expectations, or events, conditions or circumstances on which such statements are based, occur, do not occur, or change. In addition, in some cases numbers in tables do not sum to the total due to rounding.
Table of Contents INTRODUCTION... 1 HISTORIC, ECONOMIC AND DEMOGRAPHIC INFORMATION... 4 Population... 5 Industry and Employment... 6 Major Employers... 8 Personal Income... 10 Retail Sales... 11 Increase in Local Minimum Wage... 11 Land Use... 12 Residential Value and Construction Activity... 13 Commercial Real Estate Markets in Los Angeles... 15 Seismic Considerations... 15 Education... 15 MUNICIPAL GOVERNMENT... 16 BUDGET AND FINANCIAL OPERATIONS... 17 Fiscal Year 2015-16 Results... 17 Fiscal Year 2016-17 Preliminary Financial Results... 21 City s Budgetary Process... 21 Fiscal Year 2017-18 Adopted Budget... 21 Fiscal Year 2017-18 Financial Status Reports... 24 General Fund Budget Outlook... 24 Budgetary Reserves and Contingencies... 29 Financial Management Policies... 31 Risk Management and Retention Program... 32 Workers Compensation, Employee Health Care and Other Human Resources Benefits... 34 Labor Relations... 34 Retirement and Pension Systems... 37 Projected Retirement and Other Post-Employment Benefit Expenditures... 53 City Treasury Investment Practices and Policies... 54 Capital Program... 55 MAJOR GENERAL FUND REVENUE SOURCES... 56 Property Tax... 56 Utility Users Taxes... 60 Sales Tax... 62 Business Tax... 64 Licenses, Permits, Fees and Fines... 65 Documentary Transfer Tax... 66 Transient Occupancy Tax... 67 Parking Fines... 68 Power Transfers to General Fund... 68 Page
Impact of State of California Budget... 69 Information Regarding Federal Budget... 70 LIMITATIONS ON TAXES AND APPROPRIATIONS... 71 Article XIIIA of the California Constitution - Proposition 13... 71 Article XIIIB of the California Constitution - Gann Limit... 71 Articles XIIIC and XIIID of the California Constitution - Proposition 218... 72 Proposition 1A... 73 Proposition 26... 73 Future Initiatives... 74 BONDED AND OTHER INDEBTEDNESS... 75 Introduction... 75 General Obligation Bonds... 75 Voluntary Closing Agreement Program... 76 Lease Obligations... 76 Commercial Paper Program... 78 Judgment Obligation Bonds... 79 Revenue Bonds... 79 Conduit Debt Obligations... 79 Cash-flow Borrowings... 80 Summary of Long-Term Borrowings... 80 Debt Management Policies... 84 Variable Rate Obligations and Swap Agreements... 87 Proposed Additional Financings... 87 Overlapping Bonded Debt... 88 OTHER MATTERS... 89 Federal Actions... 89 Clean Water Compliance... 90 2028 Olympic and Paralympic Games... 91 LITIGATION... 92
INTRODUCTION This Introduction is an introduction to certain recent developments and the City s current financial condition; it is not a summary of this Official Statement, and is qualified by the more complete and detailed information contained in this entire Official Statement and the documents summarized or described in this Official Statement. Prospective investors must review this entire Official Statement, including the cover page and appendices, before they make an investment decision. The City of Los Angeles (the City ) is the second most populous city in the United States with an estimated 2017 population of 4.04 million persons. Los Angeles is the principal city of a metropolitan region stretching from the City of Ventura to the north, the City of San Clemente to the south, the City of San Bernardino to the east, and the Pacific Ocean to the west. Los Angeles continues to benefit from the steady expansion of the economy with its eighth year of growing revenues and its efforts to control costs. In addition, the City has settled a number of lawsuits that could have had a material impact on the City s finances, as further discussed throughout this Appendix A. Bolstered by its economic growth, the Fiscal Year 2017-18 Adopted Budget meets or exceeds three of the City s four-primary budgetary financial policies: maintaining a General Fund reserve of at least 5% (the actual July 1, 2017 Reserve Fund was 6.08% of the General Fund); appropriating at least 1% of General Fund revenues for capital improvements (1.28%); and using one-time revenues (budgeted at $65 million) for one-time expenditures (totaling $108 million in appropriations). The Adopted Budget nearly complies with the fourth policy, allocating most of the above-average growth in certain tax revenues to the budget stabilization fund or capital investment; over $79 million of the $83 million in growth was appropriated for these purposes, with the remainder transferred to the Reserve Fund to meet the City s 5% policy goal. Other key features of the Fiscal Year 2017-18 Adopted Budget include: After two years of liability payouts exceeding budgeted amounts, an additional $40 million was budgeted for liability claims. The annual appropriations for various legal settlements are met, including those related to gang injunctions and the accessibility of sidewalks and affordable housing units. The Fiscal Year 2017-18 Adopted Budget implements changes approved by City, County and State voters in recent elections. The Adopted Budget adds staffing and anticipates funding to implement housing programs for the homeless pursuant to the adoption of a county-wide sales tax for that purpose (Measure H); includes a spending plan for street and infrastructure improvements, consistent with the adoption of an additional countywide sales tax for transportation (Measure M); and establishes a Department of Cannabis Regulation (Local Measure M). The Fiscal Year 2017-18 Adopted Budget includes funding for service improvements, including funding to enable the Planning Department to update all community plans every six years; increased quality-of-life investment in graffiti abatement, tree trimming, alley repair, and cleaning streets, alleys, and homeless encampments; and public safety A-1
investments to hire firefighters and police officers, and to continue the implementation of the Police Department s Body Worn Video Camera System. The Adopted Budget also addresses many other challenges, including the need to fund increased employee-related costs of more than $192 million and a lower-than-projected power revenue transfer to reflect the combined effects of a moderate summer (which reduced power consumption and sales) and a recent settlement. The Adopted Budget addresses these challenges mainly through ongoing solutions, particularly revenue growth and departmental reductions. The City s efforts to maintain a balanced budget during the fiscal year will be tested by the same challenges it managed in recent years. Despite an increase in appropriations for liabilities, based on spending over Fiscal Years 2015-16 and 2016-17 and a review of pending cases, this amount could still fall short of the actual Fiscal Year 2017-18 need. In addition, certain existing General Fund revenues may be impacted based on policy changes that the Council may consider, in particular transient occupancy tax revenue from short-term rentals. In the longer term, the City believes there are other factors that could make the next several fiscal years challenging. These challenges include threats from the Federal government that could restrict the City s future access to Federal funding on which the City relies to fight poverty, protect communities, and maintain and develop infrastructure. At the same time, both the City s Fire and Police Pension Plan and the Los Angeles City Employees Retirement System have recently followed pension systems nationwide and reduced their assumed investment rate of return, from 7.50% to 7.25%. In conjunction with changes to various other economic and demographic assumptions, this change is expected to increase the City s required contribution to the systems in Fiscal Year 2018-19 by approximately $122 million, and could result in contribution increases in subsequent fiscal years. Further complicating the City s outlook are labor agreements that expire in June 2018. While the City s most recent Budget Outlook, prepared in connection with the Fiscal Year 2017-18 Adopted Budget, showed the elimination of projected structural deficits by Fiscal Year 2020-21, that Budget Outlook did not include the projected increased pension costs from the changed assumptions described above. (See BUDGET AND FINANCIAL OPERATIONS General Fund Budget Outlook.) A number of large infrastructure projects the City has considered pursuing could result in major long-term commitments of funds. The City has a large backload of needed street repairs, currently estimated at over $3 billion. The City has also sought funding from the Army Corps of Engineers for restoration of the Los Angeles River, which could cost in excess of $1.5 billion and require substantial matching funds from the City. In addition, the City is considering major improvements to its Civic Center, with estimates ranging from $300 million to $500 million, and expanding its Convention Center at a currently estimated cost of $500 million. These expenditures are considered long-term projects that would be pursued only if an acceptable funding framework is first established. The City is also exposed to major costs associated with compliance with the Clean Water Act ( CWA ), which regulates the discharges of pollutants into the waters of the United States by establishing quality standards. The City is responsible for helping to ensure that up to 192 pollutants in five bodies of water do not exceed certain maximum levels. The Los Angeles Regional Water Quality Control Board estimated that the City s share of the costs of projects required to meet these requirements through 2021 is approximately $2.1 billion, and approximately $7.4 billion to meet its requirements through 2041. In addition, non-compliance A-2
with these requirements within certain deadlines could expose the City to enforcement action, including substantial civil penalties and fines, and third-party lawsuits. The City is exploring various options to address funding for the projects necessary to satisfy the current Total Maximum Daily Load of regulated pollutants, including development of new sources of funding, most of which require voter approval. Without such revenue sources, these costs would be obligations of the City s General Fund and could have a material adverse impact on the General Fund. See OTHER MATTERS Clean Water Compliance. On May 31, 2017, the City agreed to settle three class action lawsuits that were consolidated before a single judge in Los Angeles Superior Court. The lawsuits alleged that the City s electric rates violate Article XIII-C of the California Constitution because they exceed the cost of providing electric service, as evidenced by the City s long-standing practice of transferring revenue from the Los Angeles Department of Water and Power ( DWP ) to the City. The settlement was preliminarily approved by the court in September, 2017, with final court approval expected in February 2018. The settlement will limit the annual amount of revenue transferred from the Department of Water and Power s ( DWP ) to the City to 8% of the retail operating revenues of the 2008 Electric Rate Ordinance on a go-forward basis. The amount of this transfer is estimated to be about $240 million annually. The Fiscal Year 2017-18 Adopted Budget and the Budget Outlook took into account the potential revenue reduction from the Department of Water and Power s Revenue Fund resulting from this settlement, and no refund of prior transfers is required from the City s General Fund. There are other pending cases that may impact the legality or amount of transfers from DWP. See, MAJOR GENERAL FUND REVENUE SOURCES Power Transfers to General Fund and LITIGATION Power Revenue Fund Transfer Litigation. A-3
HISTORIC, ECONOMIC AND DEMOGRAPHIC INFORMATION Founded in 1781, Los Angeles was for its first century a provincial outpost under successive Spanish, Mexican and American rule. The City experienced a population boom following its linkage by rail with San Francisco in 1876. Los Angeles was selected as the Southern California rail terminus because its natural harbor seemed to offer little challenge to San Francisco, home of the railroad barons. But what the region lacked in commerce and industry, it made up in temperate climate and available real estate, and soon tens and then hundreds of thousands of people living in the Northeastern and Midwestern United States migrated to new homes in the region. Agricultural and oil production, followed by the creation of a deep-water port, the opening of the Panama Canal, and the completion of the City-financed Owens Valley Aqueduct to provide additional water, all contributed to an expanding economic base. The City s population climbed to 50,000 persons in 1890, and then swelled to 1.5 million persons by 1940. During this same period, the motor car became the principal mode of American transportation, and the City developed as the first major city of the automotive age. Following World War II, the City became the focus of a new wave of migration, with its population reaching 2.4 million persons by 1960. The City and its surrounding metropolitan region have continued to experience growth in population and in economic diversity. The City s 470 square miles contain 11.5% of the area and about 39% of the population of the County of Los Angeles, California (the County ). Tourism and hospitality, professional and business services, direct international trade, entertainment (including motion picture and television production), and wholesale trade and logistics all contribute significantly to local employment. Emerging industries are largely technology driven, and include biomedical technology, digital information technology, environmental technology and aerospace. The County is a top-ranked county in manufacturing in the nation. Important components of local industry include apparel, computer and electronic components, transportation equipment, fabricated metal, and food processing. Fueled by trade with the Pacific Rim countries, the Ports of Los Angeles and Long Beach combined are the busiest container ports in the nation. As home to the film, television and recording industries, as well as important cultural facilities, the City serves as a principal global cultural center. Although the economic and demographic information provided below has been collected from sources that the City considers to be reliable, the City has made no independent verification of the information provided by non-city sources and the City takes no responsibility for the completeness or accuracy thereof. The current state of the economy of the City, State of California (the State ) and the United States of America may not be reflected in the data discussed below, because more up-to-date information is not publicly available. This information is provided as general background. Additional information on economic highlights for the City was prepared by Beacon Economics, and is available on the City s web site at http://cao.lacity.org/debt/beacon%20report%20comparative%20analysis%20june%202017.pdf. This report is not incorporated by reference. A-4
Population The table below summarizes City, County, and State population, estimated as of January 1 of each year. Table 1 CITY, COUNTY AND STATE POPULATION STATISTICS City of Annual County of Annual State of Annual Los Angeles Growth Rate (1) Los Angeles Growth Rate (1) California Growth Rate (1) (1) 2000 (1) 3,694,742-9,519,330-33,873,086-2005 (1) 3,769,131 2.01% 9,816,153 3.12% 35,869,173 5.89% 2010 (1) 3,792,621 0.62 9,818,605 0.02 37,253,956 3.86 2015 (1) 3,972,348 4.74 10,150,617 3.38 38,915,880 4.46 2016 3,999,237 0.68 10,182,961 0.32 39,189,035 0.70 2017 4,041,707 1.06 10,241,278 0.57 39,523,613 0.85 For five-year time series, figures represent average annual growth rate for each of the five years. Sources: State of California, Department of Finance, E-4 Population Estimates for Cities, Counties and the State, 2001-2010, with 2000 and 2010 Census Counts, Sacramento, California, November 2012. State of California, Department of Finance, E-4 Population Estimates for Cities, Counties, and the State, 2011-2017, with 2010 Census Benchmark. Sacramento, California, May 2017. A-5
Industry and Employment The following table summarizes the average number of employed and unemployed residents of the City and the County, based on the annual benchmark, an annual revision process in which monthly labor force and payroll employment data, which are based on estimates, are updated based on detailed tax records. The benchmark data is typically released in March for the prior calendar year. Table 2 ESTIMATED AVERAGE ANNUAL EMPLOYMENT AND UNEMPLOYMENT OF RESIDENT LABOR FORCE (1) Civilian Labor Force 2012 2013 2014 2015 2016 City of Los Angeles Employed 1,759,300 1,801,000 1,845,900 1,875,700 1,920,200 Unemployed 229,400 207,300 176,400 142,100 113,000 Total 1,988,700 2,008,200 2,022,300 2,017,800 2,033,200 County of Los Angeles Employed 4,378,400 4,482,100 4,593,900 4,668,200 4,778,800 Unemployed 536,900 485,000 412,900 332,400 264,500 Total 4,915,300 4,967,000 5,006,800 5,000,600 5,043,300 Unemployment Rates City 11.5% 10.3% 8.7% 7.0% 5.6% County 10.9 9.8 8.2 6.6 5.2 State 10.4 8.9 7.5 6.2 5.4 United States 8.1 7.4 6.2 5.3 4.9 (1) March 2016 Benchmark report as of June 16, 2017; not seasonally adjusted. Note: Based on surveys distributed to households; not directly comparable to Industry Employment data reported in Table 3. Sources: California Employment Development Department, Labor Market Information Division for the State and County; U.S. Bureau of Labor, Department of Labor Statistics for the U.S. The California Employment Development Department has reported preliminary unemployment figures for November 2017 of 4.6% statewide, 4.1% for the County, and 4.4% for the City (not seasonally adjusted). The table on the following page summarizes the California Employment Development Department s estimated annual employment for the County, which includes full-time and parttime workers who receive wages, salaries, commissions, tips, payment-in-kind, or piece rates. Separate figures for the City are not maintained. Percentages indicate the percentage of the total employment for each type of employment for the given year. For purposes of comparison, the most recent employment data for the State is also summarized. A-6
Table 3 LOS ANGELES COUNTY ESTIMATED INDUSTRY EMPLOYMENT AND LABOR FORCE (1) County State of California % of % of % of 2000 Total 2016 Total 2016 Total Agricultural 7,700 0.2% 5,300 0.1% 426,700 2.5% Mining and Logging 3,400 0.1 3,600 0.1 24,500 0.1 Construction 131,500 3.2 133,100 3.0 774,100 4.6 Manufacturing 616,300 14.9 360,400 8.2 1,305,600 7.7 Trade, Transportation and Utilities 784,900 19.0 829,900 18.9 2,990,200 17.7 Information 244,300 5.9 230,900 5.3 523,100 3.1 Financial Activities 223,400 5.4 219,800 5.0 822,900 4.9 Professional and Business Services 589,700 14.3 605,200 13.8 2,530,800 15.0 Educational and Health Services 464,900 11.2 767,400 17.5 2,537,400 15.0 Leisure and Hospitality 345,000 8.3 510,500 11.6 1,897,300 11.2 Other Services 140,200 3.4 153,400 3.5 556,900 3.3 Government 581,400 14.1 576,300 13.1 2,514,600 14.9 Total (2) 4,132,500 100.0% 4,395,700 100.0% 16,904,100 100.0% (1) The California Economic Development Department has converted employer records from the Standard Industrial Classification coding system to the North American Industry Classification System. Note: Based on surveys distributed to employers; not directly comparable to Civilian Labor Force data reported in Table 2. Source: California Employment Development Department, Labor Market Information Division. Based on March 2016 Benchmark report released March 3, 2017. A-7
Major Employers The estimated top 25 major non-governmental employers in the County in 2017 are listed in the table below. The top 25 major non-governmental employers of calendar year 2016 represented 6.4% of the labor force in in 2016, the last year for which such data is available. Table 4 LOS ANGELES COUNTY 2017 MAJOR NON-GOVERNMENTAL EMPLOYERS Employer Product/Service Employees Kaiser Permanente Nonprofit health care plan 36,468 University of Southern California Private university 20,163 Northrop Grumman Corp. Defense contractor 16,600 Providence Health & Services Southern California Health care 15,255 Target Corp. Retailer 15,000 (1) Ralphs/Food 4 Less (Kroger Co. Division) Grocery retailer 14,970 Walt Disney Co. Entertainment 13,000 (1) Albertsons/Vons/Pavilions Grocery retailer 13,000 (1) Bank of America Corp. Banking and financial services 12,500 (1) Cedars-Sinai Medical Center Medical center 12,242 NBCUniversal Entertainment 12,000 AT&T Telecommunications, DirecTV 11,500 (1) Home Depot Home improvement specialty retailer 11,200 (1) UPS Logistics, transportation and freight 10,131 Wells Fargo Bank, N.A. Diversified financial services 9,001 Boeing Co. Aerospace and defense, commercial jetliners, space and security 9,000 (1) systems California Institute of Technology Private university, operator of Jet Propulsion Laboratory 8,702 Allied Universal Security professionals 8,384 ABM Industries Inc. Facility services, energy solutions, commercial cleaning, maintenance 8,000 (1) and repair FedEx Corp. Shipping and logistics 7,000 (1) Dignity Health Health care 6,274 Costco Wholesale Membership chain of warehouse stores 6,000 (1) Amgen Inc. Biotechnology 5,616 SoCalGas Natural gas utility 5,600 Raytheon Co. Aerospace and defense 5,500 (1) (1) Business Journal estimate. Source: Los Angeles Business Journal, Weekly Lists, originally published August 28, 2017. The estimated top 25 major governmental employers in the County in 2017 are listed in the table below. The top 25 major governmental employers of calendar year 2016 represented 13.1% of the labor force in 2016, the last year for which such data is available. A-8
Table 5 LOS ANGELES COUNTY 2017 LARGEST PUBLIC SECTOR EMPLOYERS Employers Employees Los Angeles County 108,995 Los Angeles Unified School District 60,015 University of California, Los Angeles 47,596 U.S. Government Federal Executive Board 47,000 City of Los Angeles (2) 32,987 State of California (3) 28,700 Los Angeles County Metropolitan Transportation Authority 10,433 Los Angeles Department of Water and Power (LADWP) 9,438 Los Angeles Community College District 7,084 Long Beach Unified School District 6,607 California State University, Northridge 6,540 City of Long Beach 5,394 California State University, Long Beach 3,885 Los Angeles World Airports (LAWA) 3,460 Pomona Unified School District 3,022 Cal Poly Pomona 2,865 Montebello Unified School District 2,593 California State University, Los Angeles 2,513 Compton Unified School District 2,360 William S. Hart Union High School District 2,326 City of Santa Monica 2,310 City of Pasadena 2,114 Santa Monica Community College District 1,992 Mt. San Antonio Community College District 1,963 City of Glendale 1,934 (1) (2) (3) Excludes law enforcement and judiciary employees. Excludes proprietary departments (Airports, Harbor and Water and Power). Excludes education employees. Source: Los Angeles Business Journal, Weekly Lists, originally published August 28, 2017. A-9
Personal Income The U.S. Census Bureau defines personal income as the income received by all persons from all sources, and is the sum of net earnings, rental income, dividend income, interest income, and transfer receipts. Net earnings is defined as wages and salaries, supplements to wages and salaries, and proprietors income, less contributions for government social insurance, before deduction of personal income and other taxes. The following table summarizes the latest available estimate of personal income for the County, State and United States. Table 6 COUNTY, STATE AND U.S. PERSONAL INCOME Per Capita Personal Income Personal Income (1) Year and Area (thousands of dollars) (dollars) 2012 County (2) $ 486,733,508 $ 48,900 State (2) 1,838,567,162 48,369 United States (2) 13,904,485,000 44,282 2013 County (2) $ 483,578,594 $ 48,283 State (2) 1,861,956,514 48,570 United States (2) 14,068,960,000 44,493 2014 County (2) $ 514,516,564 $51,111 State (2) 1,986,025,976 51,334 United States (2) 14,811,388,000 46,494 2015 County (2) $ 549,07,019 $54,298 State (2) 2,133,664,158 54,718 United States (2) 15,547,661,000 48,451 2016 County (2) $ 563,907,868 $55,624 State (2) 2,212,691,221 56,374 United States (2) 15,912,777,000 49,246 (1) (2) Per capita personal income was computed using Census Bureau midyear population estimates. Per capita personal income is total personal income divided by total midyear population. Estimates for 2012 to 2016 reflect Census Bureau midyear population estimates as of December 2016. Estimates for 2012 to 2015 reflect county population estimates as of March 2017. Last updated: November 16, 2017 new estimates for 2016; revised estimates for 2012-2015. Source: U.S. Bureau of Economic Analysis, Table SA1 Personal Income Summary. A-10
Retail Sales As the largest city in the County, the City accounted for $44.0 billion (or 29.2%) of the total $151.0 billion in County taxable sales for 2015. The following table sets forth a history of taxable sales for the City for calendar years 2011 through 2015, 2015 being the last full year for which data is currently available. Table 7 CITY OF LOS ANGELES TAXABLE SALES (in thousands) 2011 2012 2013 2014 2015 Motor Vehicle and Parts Dealers $3,224,150 $3,662,657 $3,983,625 $4,158,168 $ 4,616,450 Home Furnishings and Appliance Stores 1,609,905 1,676,926 1,683,805 1,725,981 1,826,089 Bldg. Materials and Garden Equip. and Supplies 1,834,117 1,942,915 2,086,608 2,179,954 2,335,497 Food and Beverage Stores 2,199,481 2,322,695 2,444,701 2,582,338 2,718,199 Gasoline Stations 4,952,984 5,090,496 4,954,380 4,822,894 4,252,397 Clothing and Clothing Accessories Stores 2,715,953 2,884,984 3,032,886 3,102,222 3,190,617 General Merchandise Stores 2,660,830 2,759,578 2,873,530 2,899,454 2,725,354 Food Services and Drinking Places 6,049,187 6,564,652 6,946,625 7,534,764 8,194,963 Other Retail Group 3,599,674 3,716,658 3,943,616 3,969,898 4,112,670 Total Retail and Food Services 28,806,281 30,621,561 31,949,776 32,975,673 33,972, All Other Outlets 9,011,361 9,502,364 9,806,938 10,480,659 10,074,458 TOTAL ALL OUTLETS $37,857,643 $40,123,926 $41,756,714 $43,456,334 $44,046,697 Year-over-year growth 8.7% 6.0% 4.1% 4.1% 1.4% Source: California State Board of Equalization, Research and Statistics Division. The City experienced a 2.2% increase in sales tax receipts during Fiscal Year 2015-16 (excluding additional receipts from the restoration of the 1% local tax rate), 2.5% growth in Fiscal Year 2016-17 (again, excluding additional receipts from the restoration of the 1% local tax rate) and projects 1.7% growth in taxable sales for the Fiscal Year 2017-18 Adopted Budget. See MAJOR GENERAL FUND REVENUE SOURCES Sales Tax. Increase in Local Minimum Wage An Ordinance was adopted by the City Council on June 10, 2015, establishing a citywide minimum wage. The Ordinance requires employers with 26 or more employees to pay employees (who are not otherwise exempt under law) working within the City a minimum wage of $10.50 per hour starting on July 1, 2016 and increasing each year until July 1, 2020, when the minimum wage will be $15.00 per hour. Employers with 25 or fewer employees have an additional year before each step increase takes effect (for example, a minimum wage of $10.50 per hour would be required starting on July 1, 2017). Starting on July 1, 2022 and annually thereafter, the wage rate will be adjusted by the applicable Consumer Price Index to be effective the first of July of the applicable year. This Ordinance is expected to have minimal impact on City expenses. On April 4, 2016, Governor Brown signed a bill that makes similar changes to the statewide minimum wage, which increased from $10 per hour to $10.50 per hour on January 1, 2017, then up to $11 per hour on January 1, 2018. From there it will increase by $1 annually A-11
until reaching $15 per hour on January 1, 2022. Employers in the City will remain under the accelerated schedule of the City s ordinance or whichever standard that is most beneficial to the employee. On April 20, 2016, the Council approved amending the City s Minimum Wage Ordinance to require employers to provide sick time benefits of 48 hours per year to employees, compared to the 24 hours per year provided under State law. This sick time benefits policy became operative on July 1, 2016 for all employers. Land Use The following table, derived from data maintained by the Los Angeles County Assessor, indicates various land uses within the City based on assessed valuation and the number of parcels. Table 8 CITY OF LOS ANGELES ASSESSED VALUATION AND PARCELS BY LAND USE Non-Residential 2017-18 Assessed Valuation (1) % of Total No. of Parcels % of Total Commercial Office $ 81,696,410,903 14.94% 35,982 4.58 Vacant Commercial 2,229,933,010 0.41 1,217 0.15 Industrial 38,694,352,154 7.07 19,997 2.54 Vacant Industrial 1,841,327,493 0.34 4,094 0.52 Recreational 1,968,622,688 0.36 802 0.10 Government/Social/Institutional 3,424,152,581 0.63 3,754 0.48 Miscellaneous 412,305,160 0.08 2,867 0.36 Subtotal Non-Residential $130,267,103,989 23.81% 68,713 8.74% Residential Single Family Residence $288,756,702,948 52.79% 498,231 63.41% Condominium/Townhouse 36,815,358,543 6.73 86,529 11.01 Mobile Homes and Lots 114,122,340 0.02 3,294 0.42 Mobile Home Park 176,813,031 0.03 90 0.01 2-4 Residential Units 28,453,236,579 5.20 74,218 9.45 5+ Residential Units/Apartments 59,349,537,762 10.85 34,850 4.44 Vacant Residential 3,065,831,860 0.56 19,833 2.52 Subtotal Residential $416,731,603,063 76.19% 717,045 91.26% Total (1) Local Secured Assessed Valuation, excluding tax-exempt property. Source: California Municipal Statistics, Inc. A-12
Residential Value and Construction Activity The following table indicates the array of assessed valuation for single-family residential properties in the City. Table 9 CITY OF LOS ANGELES PER PARCEL 2017-18 ASSESSED VALUATION OF SINGLE FAMILY RESIDENTIAL PROPERTIES Single Family Residential Properties 2017-18 Average Median No. of Parcels Assessed Valuation Assessed Valuation Assessed Valuation 498,231 $288,756,702,948 $579,564 $359,390 2017-18 Assessed Valuation No. of Residential Parcels (1) % of Total Cumulative % of Total Total Valuation % of Total Cumulative % of Total $0 - $49,999 9,074 1.821% 1.821% 323,132,090 0.112% 0.112% $50,000 - $99,999 27,124 5.444 7.265 2,023,073,298 0.701 0.813 $100,000 - $149,999 36,412 7.308 14.574 4,560,616,808 1.579 2.392 $150,000 - $199,999 33,629 6.750 21.323 5,914,480,713 2.048 4.440 $200,000 - $249,999 41,478 8.325 29.648 9,321,562,776 3.228 7.668 $250,000 - $299,999 47,500 9.534 39.182 13,045,607,796 4.518 12.186 $300,000 - $349,999 50,462 10.128 49.310 16,363,241,878 5.667 17.853 $350,000 - $399,999 47,340 9.502 58.812 17,717,148,178 6.136 23.989 $400,000 - $449,999 30,179 6.057 64.869 12,809,042,611 4.436 28.425 $450,000 - $499,999 24,255 4.868 69.737 11,499,157,968 3.982 32.407 $500,000 - $549,999 20,105 4.035 73.773 10,532,476,854 6.648 36.054 $550,000 - $599,999 16,601 3.332 77.105 9,524,583,481 3.298 39.353 $600,000 - $649,999 13,833 2.776 79.881 8,631,496,534 2.989 42.342 $650,000 - $699,999 12,539 2.517 82.398 8,452,788,333 2.927 45.269 $700,000 - $749,999 9,923 1.992 84.389 7,186,656,817 2.489 47.758 $750,000 - $799,999 8,987 1.804 86.193 6,958,229,310 2.410 50.168 $800,000 - $849,999 7,298 1.465 87.658 6,015,075,619 2.083 52.251 $850,000 - $899,999 6,851 1.375 89.033 5,989,248,192 2.074 54.325 $900,000 - $949,999 6,240 1.252 90.285 5,765,801,962 1.997 56.322 $950,000 - $999,999 4,812 0.966 91.251 4,686,027,695 1.623 57.945 $1,000,000 and greater 43,589 8.749 100.000 121,437,254,035 42.055 100.000 Total 498,231 100.000% $288,756,702,948 100.000% (1) Improved single-family residential parcels. Excludes condominiums and parcels with multiple family units. Source: California Municipal Statistics, Inc. A-13
year. The table below provides a summary of building permits issued by the City by calendar Table 10 CITY OF LOS ANGELES RESIDENTIAL BUILDING PERMIT VALUATIONS AND NEW UNITS 2012 2013 2014 2015 2016 Valuation (1) $3,671 $4,246 $6,416 $6,808 $6,822 Residential (2) 1,407 1,732 2,668 3,385 3,359 Non-Residential (3) 593 605 968 880 729 Miscellaneous Residential (4) 17 48 18 28 25 Miscellaneous Non-Residential (5) 29 31 18 40 56 Number of Residential Units: Single family (6) 1,059 1,254 1,852 2,246 2,393 Multi-family (7) 5,615 7,136 9,607 13,246 11,495 Subtotal Residential Units 6,674 8,390 11,459 15,492 13,888 Number of Non-Residential Units (8) 89 0 326 613 97 Miscellaneous Residential Units (9) 477 536 274 392 672 Miscellaneous Non-Residential Units (10) 405 323 267 736 1,036 Total Units 7,645 9,249 12,326 17,233 15,693 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) In millions of dollars. Valuation represents the total valuation of all construction work for which the building permit is issued. Valuation of permits issued for Single-Family Dwellings, Duplexes, Apartment Buildings, Hotel/Motels, and Condominiums. Valuation of permits issued for Special Permits, Airport Buildings, Amusement Buildings, Churches, Private Garages, Public Garages, Gasoline Service Stations, Hospitals, Manufacturing Buildings, Office Buildings, Public Administration Buildings, Public Utilities Buildings, Retail Stores, Restaurants, School Buildings, Signs, Private Swimming Pools, Theater Buildings, Warehouses, Miscellaneous Buildings/Structures, Prefabricated Houses, Solar Heaters, Temporary Structures, Artists-in-Residence, Foundation Only, Grade Non- Hillside, Certificates of Occupancy Use of Land, Grading Hillside. Valuation of permits issued for Additions Creating New Units Residential and Alterations Creating New Units Residential. Valuation of permits issued for Additions Creating New Units Commercial and Alterations Creating New Units Commercial. Number of dwelling units permitted for Single-Family Dwellings and Duplexes. Number of dwelling units permitted for new Apartment Buildings, Hotel/Motels, and Condominiums. Number of dwelling units permitted for Airport Buildings, Amusement Buildings, Churches, Private Garages, Public Garages, Gasoline Service Stations, Hospitals, Manufacturing Buildings, Office Buildings, Public Administration Buildings, Public Utilities Buildings, Retail Stores, Restaurants, School Buildings, Signs, Private Swimming Pools, Theater Buildings, Warehouses, Miscellaneous Buildings/Structures Prefabricated Houses, Solar Heaters, Temporary Structures, Artists-in-Residence. Number of dwelling units added includes Addition Creating New Units Residential and Alterations Creating New Units - Residential. Number of dwelling units added includes Additions Creating New Units Commercial and Alterations Creating New Units - Commercial. Source: City of Los Angeles, Department of Building and Safety. A-14
Commercial Real Estate Markets in Los Angeles The following table shows the most recent information available regarding vacancy rates for commercial property in the City and the County. Table 11 CITY OF LOS ANGELES AND COUNTY OF LOS ANGELES COMMERCIAL PROPERTY VACANCY RATES (1) Year and Area Retail Office Warehouse R&D 2012 City 6.2% 16.6% 8.1% 6.1% County 6.3 16.3 8.4 5.9 2013 City 5.5 16.5 7.0 4.9 County 6.1 16.4 7.5 5.1 2014 City 5.4 16.2 6.4 5.2 County 6.1 17.0 6.9 4.7 2015 City 4.9 15.4 5.8 4.4 County 6.2 15.5 6.2 3.8 2016 City 5.0 14.0 5.7 4.3 County 6.2 14.0 6.0 3.2 (1) Vacancy rates are annual averages Source: REIS, Beacon Economics. Seismic Considerations The City is subject to unpredictable and significant seismic activity. A number of known faults run through the City, and the City lies near the San Andreas Fault, which is the boundary between the Pacific and North American tectonic plates. The complex Los Angeles fault system interacts with the alluvial soils and other geologic conditions in the hills and basins of the area. This interaction poses a potential seismic threat for every part of the City, regardless of the underlying geologic and soils conditions. In addition, there are likely to be unmapped faults throughout the City. The most recent major earthquake, the Northridge earthquake in 1994, occurred along a previously unmapped blind thrust fault. The City generally does not maintain earthquake insurance coverage; see BUDGET AND FINANCIAL OPERATIONS Risk Retention Program. Education The Los Angeles Unified School District ( LAUSD ), one of the largest employers in the City, administers public instruction for kindergarten through 12th grade ( K-12 ), adult, and occupational schools in the City and all or significant portions of a number of smaller neighboring cities and unincorporated areas. The LAUSD, which now encompasses approximately 710 square miles (making it significantly larger than the City at 470 square miles), was formed in 1854 as the Common Schools for the City of Los Angeles, and became a A-15
unified school district in 1960. The LAUSD is governed by a seven-member Board of Education, elected by district to serve alternating four-year terms. There are many public and private colleges and universities located in the City. Major colleges and universities located within the City include the University of California at Los Angeles, the University of Southern California, California State University at Los Angeles, California State University at Northridge, Occidental College and Loyola Marymount University. There are seven community colleges located within the City operated by the Los Angeles Community College District. MUNICIPAL GOVERNMENT The City is a charter city originally incorporated in 1850. Under the State Constitution, charter cities such as the City are generally independent of the State Legislature in matters relating to municipal affairs. Charter cities, however, are subject to State Constitutional restrictions; see LIMITATIONS ON TAXES AND APPROPRIATIONS. The most recent charter was adopted in 1999, became effective July 1, 2000, and has been amended a number of times by voter approval. In an amendment approved by voters in 2015 (Charter Amendment 1), the City s primary and general election dates were moved to June and November of evennumbered years, beginning in 2020, in order to align them with federal and state elections. The measure also extended the terms of officials elected in 2015 and 2017; these candidates were given five and a half-year terms instead of the customary four to transition to the new election dates. The City is governed by the Mayor and the Council. The Mayor is elected at-large for a four-year term. As executive officer of the City, the Mayor has the overall responsibility for administration of the City. The Mayor recommends and submits the annual budget to the Council and passes upon subsequent appropriations and transfers, approves or vetoes ordinances, and appoints certain City officials and commissioners. He supervises the administrative process of local government and works with the Council in matters relating to legislation, budget, and finance. As prescribed by the Charter and City ordinances, the Mayor operates an executive department, of which he is the ex-officio head. The current Mayor, Eric Garcetti, assumed office on July 1, 2013 and was elected to a second term on March 7, 2017, which will end in 2022 due to the change in election dates. The Council, the legislative body of the City, is a full-time council and enacts ordinances subject to the approval of the Mayor. The Council may override the veto of the Mayor by a twothirds vote. The Council orders elections, levies taxes, authorizes public improvements, approves contracts, adopts zoning and other land use controls, and adopts traffic regulations. The Council adopts or modifies the budget proposed by the Mayor. It authorizes the number of employees in budgetary departments, creates positions and fixes salaries. The Council consists of 15 members elected by district for staggered four-year terms. The other two elective offices of the City are the Controller and the City Attorney, both elected for four-year terms. The Controller is the chief accounting officer for the City. The current Controller, Ron Galperin, assumed office on July 1, 2013, and was elected to a second term on March 7, 2017, which will end in 2022 due to the change in election dates. A-16
The City Attorney is attorney and legal advisor to the City and to all City boards, departments, officers, and entities, and prosecutes misdemeanors and violations of the Charter and City ordinances. The current City Attorney, Mike Feuer, assumed office on July 1, 2013, and was elected to a second term on March 7, 2017, which will end in 2022 due to the change in election dates. All citywide elected officials are subject to term limits of two four-year terms, while Council members are subject to term limits of three four-year terms. The City Administrative Officer ( CAO ) is the chief fiscal advisor to the Mayor and Council and reports directly to both. The CAO is appointed by the Mayor, subject to Council confirmation. On February 1, 2017, the Mayor appointed Richard H. Llewellyn, Jr. as Interim City Administrative Officer with the departure of the former CAO, Miguel A. Santana, who had served as CAO since August 2009 and resigned effective January 16, 2017, pending a search for a permanent replacement. The new CAO will be appointed by the Mayor and confirmed by the Council. The City Treasurer (the Treasurer ) receives, invests and is the custodian of the City s funds and those of affiliated entities. The Treasurer also serves as the City s Investment Officer. The Treasurer is appointed by the Mayor and confirmed by the Council. On July 1, 2011, the Office of the Treasurer was consolidated into the Office of Finance. Claire Bartels, the Director of Finance, also serves as the City Treasurer. The City has 38 departments and bureaus for which operating funds are annually budgeted by the Council. In addition, three departments (the Department of Water and Power ( DWP ), the Harbor Department, and the Department of Airports) and one state-chartered public agency (the Housing Authority of the City) are under the control of boards appointed by the Mayor and confirmed by the Council. The City obtains water and electricity from DWP, the largest municipally-owned utility in the nation. Two departments, the Los Angeles City Employees Retirement System and the Fire and Police Pension System, are under the control of boards whose membership is comprised of Mayoral appointees and representatives elected by system members. Public services provided by the City include police; fire and paramedics; residential refuse collection and disposal, wastewater collection and treatment, street maintenance, traffic management, storm water pollution abatement, and other public works functions; enforcement of ordinances and statutes relating to building safety; public libraries; recreation and parks; community development; housing and aging services; and planning. BUDGET AND FINANCIAL OPERATIONS Fiscal Year 2015-16 Results The City s Comprehensive Annual Financial Report (the CAFR ) for the Fiscal Year Ended June 30, 2016 reported a growth in the City s total General Fund balance of approximately $67.5 million. See the https://emma.msrb.org/es1191215.pdf, which is incorporated by reference. The following two tables summarize financial information for the General Fund contained in the City s audited Basic Financial Statements prepared in accordance with generally accepted accounting principles ( GAAP ) for the periods indicated. A-17
A-18
Table 12 BALANCE SHEETS FOR THE GENERAL FUND For Fiscal Years Ending June 30 ($ in thousands) 2012 2013 2014 2015 2016 Assets Cash and Pooled Investments (1) $1,235,260 $ 791,293 $1,014,481 $1,084,125 $1,135,914 Taxes Receivable 536,069 533,711 479,482 554,084 749,917 Accounts Receivable 184,312 187,230 128,136 131,040 124,661 Special Assessments Receivable 4,598 4,816 4,518 4,417 3,691 Investment Income Receivable 6,122 5,401 4,815 7,123 7,376 Intergovernmental Receivable 47,152 54,548 155,448 135,042 125,862 Loans Receivable - - - 1 - Due from Other Funds 44,229 86,632 43,625 50,870 109,640 Inventories 19,815 17,875 18,643 20,694 36,045 Prepaid Items and Other Assets - 17,051 14,569 13,297 10 Advances to Other Funds 11,319 8,189 9,934 8,155 8,155 Total Assets $2,088,876 $1,706,746 $1,873,651 $2,008,848 $2,301,271 Liabilities: Accounts, Contracts and Retainage Payable $ 56,764 $ 54,078 $ 63,347 $ 69,758 $ 77,061 Obligations Under Securities Lending Transactions (2) - 6,879 2,580 12,703 36,108 Accrued Salaries and Overtime Payable 121,845 130,168 122,028 154,873 182,250 Accrued Compensated Absences Payable 10,124 15,433 17,182 15,654 17,733 Estimated Claims and Judgments Payable 28,189 30,269 35,015 39,922 54,364 Intergovernmental Payable 776 12 353 876 397 Due to Other Funds 47,967 71,740 98,113 47,891 84,503 Unearned Revenue - - 24 19 10 Deposits and Advances 24,007 23,316 23,612 28,349 24,793 Deferred Revenue and Other Credits (3) 528,669 576,749 - - - Advances from Other Funds 35,728 29,852 22,436 47,304 32,775 Notes Payable 601,541 - - - - Other Liabilities 61,582 45,634 43,843 53,246 71,264 Total Liabilities $1,517,192 $ 984,130 $ 428,533 $ 470,595 $ 581,258 Deferred Inflows of Resources (3) Unavailable Real Estate Tax - - $ 29,884 $ 53,497 $ 55,325 Taxes Other than Real Estate - - 269,310 314,960 417,584 Receivables from Other Government Agencies - - 154,739 132,692 120,010 Other Deferred Inflows of Resources - - 95,114 91,555 98,729 Total Deferred Inflows of Resources - - $ 549,047 $ 592,704 $ 691,648 Fund Balances Nonspendable (4) $ 31,134 $ 43,115 $ 43,146 42,146 $ 44,210 Restricted (5) - 69,712 - - - Committed - - - 2,457 1,296 Assigned (6) 267,645 242,643 230,717 253,388 392,418 Unassigned (7) 272,905 367,146 622,208 647,558 590,441 Total Fund Balances $ 571,684 $ 722,616 $ 896,071 $ 945,549 $1,028,365 Total Liabilities, Deferred Inflows of Resources and Fund Balances $2,088,876 $1,706,746 $1,873,651 $2,008,848 $2,301,271 (1) (2) (3) (4) (5) (6) (7) Includes securities held under securities lending transactions, offset by the Liability Obligations Under Securities Lending Transactions. Fiscal Year 2011-12 includes funds set-aside for repayment of TRANS maturing in the subsequent fiscal year, offset by the liability of Notes Payable. The program was temporarily halted in Fiscal Year 2011-12, until the contract for agent was renewed in December 2012. GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, established new accounting and financial reporting standards that, among other things, reclassify certain items of unavailable revenue that were previously reported as liabilities as deferred inflows of resources. The City adopted GASB Statement No. 65 for fiscal year 2014. Includes inventories and certain advances to other funds. In Fiscal Year ended June 30, 2013, this represents the City s Budget Stabilization Fund. This fund was reported as part of the Unassigned Fund Balance in all other years. Includes encumbrances, various revolving funds, and certain net receivables. Primarily consists of the City s Reserve Fund and, except for Fiscal Year 2013, the Budget Stabilization Fund. Source: City of Los Angeles, Comprehensive Annual Financial Reports. A-19
Table 13 STATEMENTS OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES FOR THE GENERAL FUND For Fiscal Years Ending June 30 ($ in thousands) 2012 2013 2014 2015 2016 Revenues: Property Taxes $1,470,799 $1,565,457 $1,662,364 $1,733,508 $1,808,486 Sales Taxes 328,059 343,628 357,255 372,782 437,775 Utility Users Taxes 634,629 623,794 631,492 637,318 614,814 Business Taxes 438,969 447,983 476,908 500,774 507,635 Other Taxes 392,686 451,304 522,341 552,549 586,375 Licenses and Permits 26,241 23,909 22,417 22,604 32,728 Intergovernmental 7,182 11,939 11,640 39,284 20,691 Charges for Services 510,401 532,512 543,882 617,481 318,462 (1) Services to Enterprise Funds 245,853 252,178 253,414 273,171 317,265 Fines 147,780 162,930 167,474 156,006 152,304 Special Assessments 1,922 1,732 2,441 1,259 1,869 Investment Earnings 21,456 16,710 19,059 20,736 38,891 Change in Fair Value of Investments (2) - (18,002) - - - Other 91,357 104,973 118,571 79,816 55,742 Total Revenues $4,317,334 $4,521,047 $4,789,258 $5,007,288 $4,893,037 Expenditures: Current: General Government $1,257,198 $1,219,179 $1,263,431 $1,333,453 $1,316,146 Protection of Persons and Property 2,279,987 2,403,195 2,562,058 2,771,591 2,797,742 Public Works 165,025 176,240 180,714 170,510 112,473 Health and Sanitation 146,270 145,768 146,422 174,136 131,438 Transportation 107,803 98,446 106,494 110,336 105,354 Cultural and Recreational Services 46,592 51,991 50,943 54,992 57,815 Community Development 30,544 32,303 36,758 43,966 2,391 Capital Outlay 17,751 25,395 27,025 29,540 46,467 Debt Service: Interest 1,152 2,062 1,939 1,472 4,339 Debt Service: Cost of Issuance 940 955 907 927 807 Total Expenditures $4,053,262 $4,155,534 $4,376,691 $4,690,923 $4,574,972 Excess (Deficiency) of Revenues Over Expenditures $ 264,072 $ 365,513 $ 412,567 $ 316,365 $ 318,065 Other Financing Sources (Uses) Transfers In $ 270,660 $ 307,458 $ 294,383 $ 302,147 $ 349,928 Transfers Out (486,336) (520,098) (534,263) (573,493) (600,527) Total Other Financing Sources (Uses) (215,676) (212,640) (239,880) (271,346) (250,599) Net Change in Fund Balance 48,396 152,873 172,687 45,019 67,466 Fund Balances, July 1 520,058 571,683 722,616 898,479 (3) 945,549 (Decrease) Increase in Reserve for Inventories 3,230 (1,940) 768 2,051 15,350 Fund Balances, June 30 $ 571,684 $ 722,616 $ 896,071 (3) $945,549 $1,028,365 (1) (2) (3) Reduction in these revenues for Fiscal Year 2015-16 reflect changes in reporting of certain inter-fund reimbursements for expenditures that were front-funded by the General Fund and recognized as revenues in prior fiscal years. Typically, any losses due to fair market valuation is netted out of interest earnings. Losses were reported separately in Fiscal Year 2012-13 so as to avoid reporting negative investment earnings. In compliance with GASB implementation guidelines on fund categories, certain funds were reassigned from Special Revenue Fund type to General Fund type, thereby resulting in the differences in fund balances. Source: City of Los Angeles, Comprehensive Annual Financial Reports. A-20